Better trust your ‘basic instinct’

Take a pause and tread cautiously while mapping the long and short of making an investment. Many of us really do not understand the investment cycle putting it simply the intended investors do not know how to distinguish and space out returns amid the myriad options available today.

For a few knowledgeable investors that wouldn’t be a big deal. But for most others who jump into any investment opportunity to make a quick buck, there’s a still a long way to go in understanding the fine print.

Of course, the beauty of an investment plan is that it is crafted in its own time and space and fetches you the desired effect only when certain terms and conditions are met. The net results are not too different either. Already, investment experts are advising separate strategies for short and long-term investing.

Investors surely need to adopt different strategies as factors to be considered may differ depending on the time horizon of investment. Decisions on long-term investments, for instance, would be more dependent on the macro factors and the future outlook expected to develop and unfold over a period of time such as the stage of business cycle, business development and earnings potential of the underlying investment asset, among others.

Long-term investments need to be based on intrinsic values of the asset and could be value buying strategies especially in case of equities, where the timing of the value unlocking cannot be determined exactly. Moreover, for long-term investments one also needs to do an asset allocation for optimizing the risk/ reward ratio keeping future goals and objectives in perspective.

In case of short-term investments, however, the decisions are largely driven by factors such as incorrect pricing of assets created due to demand supply gaps, liquidity factors, arbitrage opportunities, and event-driven situations, among others. Here, one needs to analyze the short-term trends volatility expected and take a decision based on such factors to a large extent.

While taking short-term decisions, one also needs to keep a close tab on the risks which may arise, apart from keeping a time-frame of the expected scenario as well as the gain which one is hoping for. In case it does not happen within expectations, one has to be ready to exit with a predetermined maximum loss level so as not to get stuck in a long-term negative situation.

Investors need to adopt strategies based on the financial goals they have set for themselves and should opt for products accordingly. Investments should definitely be made based on one’s needs and goals, the returns offered by various instruments and the time-frame for which one wants to remain invested.

Each of the financial products available today — ranging from bank deposits, bonds, life insurance, mutual funds to stocks – is structured along factors such as term, risk and liquidity to meet different needs. So, for instance, “if one wants to save money with a short time-frame of about 1-2 years, a bank FD might be appropriate. However, if one needs to save towards a goal that is 8-10 years away, investing in a product like ULIP, which offers equity exposure as well as protection (and, therefore, guarantees that the goal will be met), might be more appropriate.